Value-Add Real Estate:
As markets return to a normalized state, attractive opportunities are reemerging for direct loans on ‘value-add’ real estate. LMREI’s management team has over 12 years and $5.0 billion of experience in originating and managing direct “value-add” real estate loans, including $2 billion from LMREI’s current debt funds, LMREC and LMREC II.
LMREI focuses on value-add multifamily, office, retail, industrial and other commercial real estate assets located in primary and secondary markets throughout the United States and Canada. LMREI executes transactions in a timely, professional, and responsive manner, providing clients with the ability to meet their investment objectives.
LMREI’s target assets have a re-leasing, redevelopment, renovation, and/or repositioning component. In many cases, these assets are also in need of a replacement of management and/or a reduction of expenses. Value assets primarily depend on asset level improvement and not market growth. LMREI’s value-oriented strategy focuses on borrower execution of a cash flow growth business plan in supply constrained, high demand markets. The value opportunities that LMREI focuses on include many of the following:
- Rehabilitation, where the increases in cash flow can act as a hedge against rising interest rates
- Stabilized cash flows but requiring short term interim financing due to dislocations in the permanent market
- Assets acquired with timing constraints
- Prior ownership had insufficient capital to complete improvements or to compete with the market
- Aggressive leasing of under-managed properties
- Properties have below market rents and/or occupancies
- Strong sponsorship with significant track record
LMREI applies its same “bottom up” underwriting approach to direct loan investments, including assets improving to current market levels, no reliance on market growth, rising future cap rates and financing costs, strong sponsorship and fully capitalized renovation plans.
CRE Securities Strategy:
LMREI has invested over $315 million in CRE securities in the last 12 months, including $100 million in AAA rated CMBS.
Given the current illiquidity in the market, there are unique opportunities available in high quality senior securitized debt collateralized by stabilized commercial assets. All security offerings are not created equal, and some offer much more risk than others. By approaching these diverse pools of securitized collateral from the asset level using a “bottom up” approach, LMREI’s managers and financial professionals have the ability to identify real estate securities that are trading below value due to broken capital markets - not fundamentals.
LMREI managers are not traders
- Produce internal credit analysis of collateral based on proven track record as a real estate underwriter and operator
- View investments as a long term holder of the collateral; not trading on ratings and market fluctuations
- Do not depend on credit ratings for assessing price and value
- Use traders and ratings only for sourcing and pricing transparency; not value
In the markets
- Manage multiple national real estate portfolios and visit these markets often
- Have active working knowledge of the submarkets, specific locations, and fundamentals affecting the collateral we have and will purchase
These elements separate us from many of the current owners of real estate securities who are capital market focused, rather than experts in the underlying collateral. Their financial arbitrage or investment strategies were based on the belief that diversification, granularity, and ratings provided principal protection. However, it is apparent today that this is not the key to underlying value, as these same managers have become distressed sellers.
LMREI relies on its thorough underwriting analysis of the underlying collateral fundamentals to derive the value of a security. This analysis involves an in-depth examination of these fundamentals, including:
- Sponsor strength
- Submarket rental rate and occupancy trends
- Tenant credit profiles
- Local employment growth
- Future supply analysis, and
- Various other comparative investment metrics.
LMREI manages several national portfolios and leverages its broad database of local real estate professionals and granular submarket data to complete its analysis. These resources provide LMREI a distinct “hands-on” advantage for maximizing value with new and existing investments.
As this cycle continues, distressed single loan assets, portfolios and REO will become available from banks that are forced to sell as they lack the timeframe, operational expertise, or liquidity to realize a reasonable return on their investment. In evaluating these opportunities, LMREI applies the same “bottom up” underwriting analysis of underlying collateral fundamentals that it does to all of its investments.
LMREI’s team possesses both the operational expertise and past experience to fully capitalize on these opportunities. Senior management’s extensive workout background is imperative in the current market where loan modification, restructuring, foreclosure and litigation are necessary components of successful asset management. In fact, the principals of LMREI restructured, modified or foreclosed on over $2 billion in real estate loans and securities in the last downturn of the early 1990’s and have successfully restructured over $350 million and managed another $200 million in distressed real estate assets in the last 9 months.
While specific modification terms are tailored to each transaction, all of LMREI’s recent restructurings have the following characteristics:
- Capital contribution by borrower into interest and/or operating reserve
- Loan maturity date extension to help through financial downturn
- Cash flow sweep to lender
- Deferral of a portion of interest payment to exit fee
If LMREI is unable to reach a reasonable modification agreement with a distressed borrower, the team will pursue foreclosure. In a foreclosure situation, management utilizes its “on the ground” asset management expertise to immediately take ownership of the asset, address any deferred maintenance and operational issues and implement a comprehensive stabilization strategy.
LMREI’s “hands on,” active asset management style and experience are critical to unlocking the value within distressed debt transactions.
Leverage has never been and will continue not to be a primary motivation in making an investment. LMREI seeks prudent levels of debt for its investments in order to achieve reasonable yields without sacrificing credit or taking on any undue risk. Adhering to this philosophy, LMREI’s funds have historically obtained lower levels of leverage than their peer groups.